Corporation Tax Marginal Relief: A Complete UK Guide (FA 2021 Framework, 2026/27)

Cross £50,000 of profit by a single pound and, without corporation tax marginal relief, your whole profit would jump from the 19% small profits rate to the 25% main rate: a six-percentage-point cliff on every pound. Marginal relief is the smoothing mechanic that sits between those two rates. It tapers your effective rate from 19% at the lower limit to 25% at the upper limit, so you climb a continuous curve rather than fall off a cliff.

Get the mechanic right and you keep effective rates where they should sit; get the associated-companies count wrong and HMRC can claw back relief on enquiry. The formula, the qualifying conditions, the associated-companies divisor and the close investment-holding company exclusion are all below. If you run property companies, the CIHC-via-family-tenant trap, multi-SPV divisor scenarios and property-LtdCo worked examples sit in marginal relief for property companies.

The Finance Act 2021 framework

The Finance Act 2021 inserted the current Corporation Tax Act 2010 sections 18A to 18S framework, with effect from accounting periods beginning on or after 1 April 2023. Before that, from 2017, there was a single main rate of 19% and no marginal relief at all. The FA 2014 abolition of the original small profits rate did not last: the FA 2021 reinstatement brought back a structurally different SPR plus marginal-relief regime, this time with a divisor mechanic for associated companies. That framework has applied through the 2023/24, 2024/25, 2025/26, and now 2026/27 financial years.

The headline rates:

• Small profits rate 19% on augmented profits up to £50,000 (the lower limit), per CTA 2010 s.18A.
• Main rate 25% on augmented profits above £250,000 (the upper limit).
• Marginal relief between £50,000 and £250,000, per CTA 2010 s.18B and s.18D.

The marginal relief formula

CTA 2010 s.18D sets out the relief formula. The relief F is given by:

F = (U − A) × (N / A) × standard fraction

where:

• U is the upper limit (£250,000 for a single company);
• A is augmented profits (taxable total profits plus qualifying exempt distributions from non-group companies);
• N is taxable total profits;
• standard fraction is 3/200 for the current framework.

You subtract the relief F from the main-rate CT charge on taxable total profits. The effect is that your effective rate rises smoothly from 19% at the lower limit to 25% at the upper limit, which is exactly the curve the mechanic is built to deliver.

Who qualifies, and who is excluded

CTA 2010 s.18A sets the qualifying conditions for the small profits rate. Your company qualifies if:

• It is UK resident in the accounting period.
• It is not a close investment-holding company (CIHC) under s.18N.
• It is not in oil-and-gas ring-fence territory under s.18C (not relevant if you are a property landlord).

The marginal-relief trigger at s.18B applies where your company would have qualified for SPR but its augmented profits exceed the lower limit. So if you qualify for SPR at £50,000 and below, you also qualify for marginal relief between £50,000 and £250,000.

If you hold property in a company, the exclusion that matters most is the CIHC exclusion at s.18N. A CIHC is a close company whose business does not consist wholly or mainly of one or more of the qualifying purposes listed in s.18N(2). Those qualifying purposes include:

• Carrying on a trade or trades on a commercial basis.
• Making investments in land, or estates or interests in land, where the land is let or intended to be let to persons who are not connected with the company.

The property-investment carve-out is what protects most arm's-length BTL SPVs. The connected-tenant exclusion at s.18N(3) is HMRC's expansive reading: if you let to a connected person on below-market terms, the whole company risks falling into CIHC and being denied SPR and marginal relief entirely. The discipline is simple. Charge market rent on every connected let.

The associated-companies divisor

CTA 2010 s.18E defines an associated company: at any time when one of the two companies has control of the other, or both are under the control of the same person or persons. Control is defined at s.450, and it covers shareholding majority, voting majority, board control, and economic interest.

The divisor works through s.18D: the lower and upper limits are divided by 1 plus the number of associated companies. For a five-SPV group the divisor is 5, so each SPV's effective limits become £10,000 (lower) and £50,000 (upper). An SPV that would have sat comfortably mid-band on its own can find itself paying the main rate once it is one of five.

You count associated companies per accounting period, capturing any company that is associated at any point in the period. Genuinely dormant companies (no trading or investment activity, no profits arising) are usually left out, but the test is fact-specific and HMRC challenges dormant-exclusion claims where the dormancy is artificial.

Augmented profits

CTA 2010 s.18L defines augmented profits as your taxable total profits plus qualifying exempt distributions received from non-group companies. You compute the CT charge itself on taxable total profits only, but the threshold test (whether you are below £50,000, between £50,000 and £250,000, or above £250,000) uses augmented profits. That distinction catches people out.

In practice, dividends you receive from non-51%-group companies count towards the threshold test even though the dividends themselves are CT-exempt (under the CTA 2009 Part 9A distribution exemption). So if your company has £40,000 of rental profits and receives a £20,000 dividend from a minority shareholding in a non-group company, it has £60,000 augmented profits and falls into the marginal-relief band. The CT computation still runs on the £40,000 taxable total profits, but at the marginal-relief band rates.

Distributions from 51%+ group companies are excluded from augmented profits under s.18L(2). That is the protection for group structures: intra-group dividends do not inflate your threshold test.

Five worked examples

Example 1: Profit just over the lower limit

Company A (UK resident, not CIHC, not ring-fence) has augmented profits £60,000 for the accounting period ending 31 March 2027. £60,000 exceeds the £50,000 lower limit but is below the £250,000 upper limit, so marginal relief applies.

F = (£250,000 − £60,000) × (£60,000 / £60,000) × (3/200) = £190,000 × 1 × 0.015 = £2,850 marginal relief.

CT at main rate £60,000 × 25% = £15,000. Less relief £2,850 = £12,150 CT. Effective rate 20.25%.

Cross-check the position: at £50,000 (lower limit) the effective rate would be 19% exactly, at £250,000 (upper limit) it would be 25% exactly, and at £60,000 it sits at 20.25%, right where the curve says it should.

Example 2: Mid-band

Company B has augmented profits £150,000.

F = (£250,000 − £150,000) × (£150,000 / £150,000) × (3/200) = £100,000 × 1 × 0.015 = £1,500.

CT at 25% × £150,000 = £37,500. Less £1,500 = £36,000 CT. Effective rate 24.0%.

Example 3: Just below the upper limit

Company C has augmented profits £240,000.

F = (£250,000 − £240,000) × (£240,000 / £240,000) × (3/200) = £10,000 × 0.015 = £150.

CT at 25% × £240,000 = £60,000. Less £150 = £59,850 CT. Effective rate on the £240,000 = 24.94%.

This is where the 26.5% effective marginal rate shows up. Look at the tax cost of the last pound as the company moves from £240,000 to £240,001. That pound has no marginal relief left (the relief is already extinct at the upper limit), it attracts 25p of CT, and it erodes the existing relief by about 1.5p, for a net marginal cost of about 26.5p. The 26.5% is the slope of the cost curve at the top of the band, not a flat rate you pay across the whole band.

Example 4: Associated-companies divisor

Say you own four SPVs, all under common control, and each has £75,000 augmented profits. N + 1 = 4 (the company plus three associated companies). The limits divide by 4: lower £12,500, upper £62,500.

£75,000 of profit now exceeds the £62,500 divided upper limit. Each SPV pays main rate 25% on the full £75,000 = £18,750. Total group CT 4 × £18,750 = £75,000.

Now compare the counterfactual: had the same £300,000 aggregate profit sat in one company with no associated companies, that single company would be above the un-divided upper limit (£250,000) and would also pay main rate 25% on the full £300,000 = £75,000. Here the fragmentation makes no CT difference, because the aggregate profit exceeds £250,000 either way.

The divisor really bites when individual-SPV profit lands where it would have qualified for marginal relief before division but exceeds the divided limit. Take four SPVs each at £40,000 profit. Undivided, each SPV is below £50,000 and pays SPR 19%. Divided (limits £12,500 to £62,500) each SPV is in the marginal-relief band, and together they pay more CT than a single company holding the £160,000 in the marginal-relief band would.

Example 5: Augmented profits via dividend receipt

Holding-co structure: Mawell Holdings Ltd receives a £30,000 dividend from a non-group company (a 5% stake in an unrelated trading company). Mawell Holdings's taxable total profits are £40,000 (rental income from directly-held BTL flats).

Augmented profits for the marginal-relief threshold: TTP £40,000 + non-group qualifying exempt distribution £30,000 = £70,000. £70,000 exceeds the £50,000 lower limit, so marginal relief applies to the £40,000 TTP (the dividend is itself CT-exempt under the distribution exemption but counts for the threshold test).

F = (£250,000 − £70,000) × (£40,000 / £70,000) × (3/200) = £180,000 × 0.5714 × 0.015 = £1,543.

CT at 25% × £40,000 = £10,000. Less £1,543 = £8,457 CT. Effective rate on the £40,000 TTP = 21.14%.

The formula uses N / A (taxable total profits over augmented profits) as a fraction, which scales the relief to the TTP rather than to the augmented profits. Where N = A (no non-group dividend) the fraction is 1; where N < A (a non-group dividend received) the fraction is less than 1 and your relief shrinks accordingly.

Common mis-calculations

Five errors come up again and again:

• Using TTP instead of augmented profits in the threshold test. Easy to do if you hold a single company and receive small dividends from minority investments, and assume the dividend does not touch the CT threshold.
• Forgetting associated companies. Common when you run several SPVs and do not realise that siblings under the same person's control count under s.18E.
• Treating 26.5% as a flat rate. The 26.5% is the marginal rate on the last pound at the top of the band, not a flat rate across the band.
• Applying the limits without the divisor across a multi-SPV portfolio. Each SPV does NOT get its own £50,000 to £250,000 band; the limits divide.
• Assuming dormant companies count as associated. Genuinely dormant companies are usually excluded, but artificial dormancy designed to defeat the associated-companies count gets challenged by HMRC.

How to claim the relief

You do not claim marginal relief separately. It is automatic in the CT600 computation: HMRC's filing software and most commercial CT software work the relief out from the augmented profits figure and the associated-companies count you enter. The one entry to get right is the associated-companies count for the accounting period. This is where HMRC's enquiry attention lands, so make sure your dormant exclusions hold up and the count reflects the position right through the period, not just at the year-end.

You can validate workings using HMRC's own Marginal Relief Calculator at gov.uk/marginal-relief-calculator. The calculator applies from 1 April 2023 onwards.

If you hold property in a company

The CIHC-via-connected-tenant trap and the multi-SPV divisor get the full property-LtdCo treatment in marginal relief for property companies. To see the whole rate stack your company faces this year, look at corporation tax rates for property companies 2026/27. And if you are weighing up whether managing the marginal-relief band is even the right lever, or whether something else should come first, corporate tax planning strategies sets that judgement out.